According to FIELD, a leading U.S. economic development think tank, over 10 million of these entrepreneurs, primarily minorities and women, lack access to small business capital.
While the formal banking sector provides loans to small businesses and government programs such as the Small Business Administration (SBA) seek to increase their availability, many entrepreneurs cannot access these mainstream sources of capital. Frequently, businesses are not able to obtain bank or SBA loans because:
- The loan request is too small for the banks to consider;
- The borrower's credit history is insufficient, or the borrower has not established formal credit in the United States;
- The borrower's business has not been in operation for a sufficient amount of time (Typically, banks require at least two years in operation).
A SUCCESSFUL U.S. MICROFINANCE MODEL
Microlenders across the U.S. are successfully bridging the credit gap that is prevalent within low-to moderate-income communities. By creating a lending model adapted to meet the needs of microentrepreneurs located in the U.S., microlenders boast repayment rates that rival those of traditional lenders.
The Association for Enterprise Opportunity reports that over $300 million in microloans averaging $7,000 have been distributed historically by their members in the United States - each dollar contributing to stronger businesses and communities.
While microfinance in the U.S. has a strong foothold, the industry has not yet risen to scale. Of the 10 million small businesses in the U.S., the Association for Enterprise Opportunity reports that microlenders are reaching only 2 percent of the individuals in need of their services. High operational costs in the U.S. greatly limit the ability of MFIs to expand into additional underserved markets. In an attempt to rise to scale, U.S. MFIs are:
- Implementing technology solutions that lower the cost of lending operations, such as online loan applications
- Forming meaningful partnerships with other community-based organizations to reduce marketing costs and expand lending footprints
- Diversifying funding sources to include corporations willing to make socially responsible investments, to both increase lending capital and cover operational costs